Labuan offshore banks post losses

Labuan offshore banks post losses

KUALA LUMPUR (Dow Jones): Offshore banks operating in Malaysia's tax haven of Labuan island on the north coast of Borneo posted a pretax loss of US$268.9 million for 1998, swinging from a pretax profit of $120.3 million the year before.

It was the first loss incurred by the Labuan offshore banks since the tax haven was established nine years ago.

A report by the financial center's chief regulator, made available to Dow Jones Newswires Monday, states the loss was due to higher non-performing loans among banking groups hurt by the regional economic crisis.

Non-performing loans hit 11 percent of total loans at end 1988, compared to 1.1 percent in 1997, according to the Labuan Offshore Financial Services Authority, or Lofsa.

It added that total loans outstanding declined by 13.3 percent to $15.1 billion, compared to $17.5 billion in 1997.

Set up in 1990, the Malaysian government has spent nearly six billion ringgit transforming this one-time sleepy backwater into a regional financial hub.

To preserve its position as an offshore financial center, Labuan is the only place in Malaysia where capital controls, which the government imposed last September, don't apply. Here foreigners are allowed to withdraw and invest funds without any restrictions.

"The significant increase in non-performing loans reflected the effects of the regional financial crisis on Labuan offshore banks as the bulk of the loans exposures were to customers in the countries in Asean," the report said referring to member nations of the Association of Southeast Asian Nations.

There are currently 62 offshore banks operating in Labuan and the Lofsa report says that total provisions for non-performing loans made by those banks amounted to $921.7 million in 1998. As a result of the higher non-performing loans, the ratio of loan loss reserves to non-performing loans was 58.1 percent in 1998, compared with 101.9 percent in 1997, the Lofsa report said.